Gasoline Prices: Still Good News

April 13, 2002 • Commentary

Crude oil prices are at a six‐​month high. Gasoline prices have jumped 20 percent in the last month. Welcome to another stanza of the oil price cycle, but don’t cry in your (more expensive) milk. Gasoline might still be the best buy in town.

I recently compared prices in gallon equivalents at a local supermarket that had gas pumps in the parking lot. Bottled water was going for between $0.90 per gallon for the store label, to about $6.30 for a gallon of something with a French‐​sounding name. The price of a gallon of milk ranged from $2.80 to $4.00, orange juice from $5 to $6, and a gallon of beer from $5 to over $14. A gallon of the kind of wine you can buy by the gallon cost $9.50, while top‐​of‐​the‐​line champagne was going for over $650 per gallon.

The price of gasoline outside ranged from $1.40 for regular to $1.60 for supreme. Subtracting the $0.38 Federal and state tax put the price of regular down to about $1 per gallon. On a pre‐​tax basis, then, gasoline was significantly cheaper than everything but the generic brand of bottled water. This would still be true if gasoline was still at last year’s highs of around $1.70 to $2.00 per gallon.

There’s more. While the other products have not changed much over the years, gasoline has gone high‐​tech. Today’s fuels are refined in highly specialized facilities to be environmentally friendly. Along with on‐​board improvements in automobile combustion, today’s gasoline emits 95 percent less air pollutants than a similar vehicle did in the 1970s.

The relatively low price of gasoline seems odd since all the store items are what environmentalists would call “renewable” — that is, they are made from resources that will never run out. Why would a renewable good cost less than a “depletable” substance like oil‐​based gasoline? Because it costs more to “refine” milk, beer, and orange juice than it does gasoline. This means that more resources are expended producing these drinks, something to remember when a farm state advocate suggests that we replace gasoline with “renewable” ethanol. Ethanol is more expensive than gasoline because it takes more resources — including energy — to produce it.

If gasoline is so much cheaper than other liquids, why is there so much angst when prices rise? Typically, when gas prices surge, the government’s first reaction is to investigate the oil industry for “price gouging.” Since 1973, there has been an average of about one such investigation every two years. None of these studies has found that anti‐​consumer conspiracies caused prices to rise. Instead, every investigation has concluded that supply and demand fundamentals were at work.

Often, it is found that government actions were behind the unfavorable price shift. Most of the world’s crude oil reserves are owned and produced by governments. State‐​owned monopolies, like OPEC, routinely withhold supplies, which private individuals and corporations cannot do in an open market.

In the United States, environmental regulations have caused some recent price spikes. A number of cities around the country have mandated that the gasoline sold there must meet special local requirements. These so‐​called “boutique” fuels have made the business of supply and distribution far more complex. As the chairman of the Senate Energy and Natural Resources Committee explained, “fuel made for consumption in Oregon is not suitable for California. Fuel made for distribution in western Maryland cannot be sold in Baltimore. Areas such as Chicago and Detroit are islands in the fuel system and require special ‘designer’ gasolines. Just between Chicago and St. Louis, a distance of 300 miles, there are four different grades of gasoline required.”

Any event reducing supply for these specialty gasolines risks a price spike, particularly during the summer peak‐​demand season. Regulators are now working to better standardize the environmental characteristics of motor fuels to prevent future problems.

It seems just short of miraculous that a “depletable” resource that must be produced, transported, refined, and transported again is cheaper than anything but generic bottled water. Maybe instead of investigating the relatively low price of gasoline, the government should check into its own regulatory and tax policies that artificially reduce supply or raise prices. And if something must be investigated, maybe it should be the price of water bottles with French‐​sounding names.

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